Inching Forward on Credit Scores

In December I wrote about problems with traditional credit scoring systems, which put some consumers at a disadvantage because important information isn't included. Now one major credit reporting agency, Experian, has announced a change that represents a meaningful step forward, but it's not enough.

While a person's credit history -- mortgages, car loans, credit cards, etc. -- is included in these models, other types of bill-paying usually are not. Much information that might document that an individual pays his or her bills responsibly -- payments for rent and utilities, for example -- is commonly not included in credit reports. That leaves lots of responsible folks who, for one reason or another, haven't had a lot of credit at a disadvantage, and those left out disproportionately fall into certain demographic groups, including people of color, immigrants, and young adults.

Enter Experian, which announced recently that it would incorporate rent payment data from its recently-acquired RentBureau subsidiary into its credit scores. Experian deserves credit for a step forward that points the way to exactly the sort of changes we need -- but it's only one step, and thus far reviews have been mixed.

For one thing, RentBureau's database only covers about 8 million renters. That's barely more than one-fifth of U.S. rental households, estimated at about 39 million. And some point out that reporting of this additional information may have a negative effect on low-income families struggling to pay the bills during the current recession. In an interview with San Francisco Chronicle columnist Kathleen Pender, tenant advocate Ted Gullicksen worried that "a tenant who is lawfully withholding rent [due to a dispute with the landlord] could be reported as not paying rent."

A little perspective is in order here. It's clearly a good thing for credit scores to contain more thorough and accurate information that truly reflects an individual's willingness to pay their bills, and for that reason other credit reporting agencies should follow Experian's lead. As advocates for consumers, our objective shouldn't be to have only positive information reported, just as parents wouldn't want their child's school to report only the child's good behavior. It's to make sure that the information reported and the resulting credit score accurately reflect the person's willingness to pay their bills, and that these systems treat all groups of potential borrowers equally and fairly.

A lot more work is needed to make credit ratings accurately reflect the real world. Beyond including the most complete data possible regarding rent, utilities and other payments not now captured, it also means finding ways to adjust for special circumstances. For example, if a region (or, as is currently the case, the whole country) is economically depressed, that's going to affect credit scores across the board. That is, individuals' credit scores will dip not because they've suddenly become irresponsible, but because the economy is in the tank, and the models should take that into account.

The law presently allows consumers to dispute inaccurate information on credit reports. In my view, this protection should cover legitimate landlord-tenant disputes, but if that issue needs to be clarified, it should be.

While Experian's action does not by itself create a new day of fairer, more inclusive credit scores, it just might be the first step on a path that will take us there. But no one should take that for granted.